ECB Reaches End of Road for Bond-Buying Era: Decision Day Guide

(Bloomberg) -- Mario Draghi is about to end an era by halting the European Central Bank’s flagship stimulus program even with an economic outlook that is murky at best.

The ECB president is expected to stick to the plan made six months ago to end bond purchases at 2.6 trillion euros ($3 trillion), arguing that the euro area’s fundamentals are still sound enough to support the buildup of inflation. That’s despite the ECB being poised to lower its forecast for growth and consumer prices when it publishes updated projections on Thursday, according to people familiar with the matter.

More than four years after the U.S. Federal Reserve ended its program -- the euro area’s monetary guardian is halting QE amid a sharp weakening in economic data, global trade tensions, Brexit and a potential Italian fiscal crisis.

ECB Reaches End of Road for Bond-Buying Era: Decision Day Guide

With that backdrop, Draghi is unlikely to drop new hints on when interest rates will start rising, though investors might get an update on the strategy for reinvesting maturing bonds. The ECB will announce its decision at 1:45 p.m. in Frankfurt, and the president will hold a press conference 45 minutes later.

What Our Economists Say...
“We expect the European Central Bank to lower its GDP forecasts, but strike an assured tone at the Dec. 13 meeting and press conference -- it will want to prevent expectations of rate hikes from slipping further into the future.”

-- Jamie Murray, David Powell and Maeva Cousin, Bloomberg Economics. See our EURO-AREA PREVIEW

Economic Prospects

Dwindling exports and a slowdown in spending and investment cut the pace of euro-area growth in half last quarter. Since then, data have pointed to persistent weakness.

ECB Reaches End of Road for Bond-Buying Era: Decision Day Guide

Economists surveyed by Bloomberg say threats to the outlook have increased since the last policy decision, citing global trade spats and Italian politics as their biggest concerns. Yet policy makers are likely to maintain their assessment that risks are still “broadly balanced,” keeping to their narrative that the economy is facing a temporary blip as it transitions into a pace closer in line with its potential.

The threat of a global slowdown and political instability are already taking their toll on Switzerland, an economy closely connected to the euro area. The Swiss National Bank cut its growth and inflation forecasts earlier on Thursday while restating its readiness to intervene in currency markets to stem the franc’s strength. Still, Norway’s central bank said it will probably need to raise its main interest rate again in March

Consumer-Price Outlook

While headline inflation has hovered around the ECB’s goal of just below 2 percent for the past seven months, it’s largely driven by energy and set to ease after the recent slide in oil. A gauge stripping out volatile components clocked in at 1 percent in November.

ECB Reaches End of Road for Bond-Buying Era: Decision Day Guide

Updated projections will include a first glimpse at price developments in 2021. The number will be crucial for policy makers arguing that the effects of quantitative easing won’t cease with the end of net asset purchases.

Maturing Debt

Policy makers have spent the past weeks discussing changes to their reinvestment strategy and hinted at an announcement in December.

ECB Reaches End of Road for Bond-Buying Era: Decision Day Guide

Economists and investors can expect more clarity on how much flexibility the region’s central banks will allow themselves with regard to time frame, jurisdiction and asset classes in which proceeds from maturing debt will be spent. At the same time, Draghi is unlikely to be forthcoming on the overall duration of reinvestments.

Bank Funding

Since it became clear the ECB would probably end bond purchases, attention shifted to alternative means of support.

ECB Reaches End of Road for Bond-Buying Era: Decision Day Guide

Economists see the central bank handing out new long-term loans next year. While an announcement on Thursday is unlikely, Draghi may acknowledge that the Governing Council has discussed the issue and may take a decision in the coming months.

Interest Rates

Policy makers are likely to reiterate their guidance that borrowing costs will remain on hold “at least through the summer of 2019.” While uncertainty surrounding the economic outlook hasn’t changed economists’ prediction for a lift-off in the deposit rate in September next year, it pushed back their forecast for when the rate will reach zero. Investors are pricing the first hike for the first quarter of 2020.

ECB Reaches End of Road for Bond-Buying Era: Decision Day Guide

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